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Venturesome – social purpose finance

Venturesome – social purpose finance. Paul Cheng Investment Manager, Venturesome. Agenda. Introduction to Venturesome Funding needs and financial mechanisms Future challenges Case studies. Venturesome: filling a funding gap. Charities are undercapitalised

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Venturesome – social purpose finance

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  1. Venturesome – social purpose finance Paul Cheng Investment Manager, Venturesome

  2. Agenda • Introduction to Venturesome • Funding needs and financial mechanisms • Future challenges • Case studies

  3. Venturesome: filling a funding gap • Charities are undercapitalised • few charities are able to create a surplus that they can transfer to their balance sheet • funding is primarily available in the form of revenue funding; there is very little capital investment available to charities • Our vision is that, by 2012, lack of access to capital is no longer a major barrier to charities achieving their social impact

  4. Our track record • Since 2002, we have offered over £10m to 150 charities • Default rate is very low: <5% • We are currently managing a fund of £8m • In 2007, we were awarded Most Innovative Charity at Britain’s Most Admired Charities awards • We learn from our investment in charities, and share this learning with the wider social investment market, encouraging a more efficient use of capital

  5. Mainstream VC Specialist VC VC / Social Social / VC Philanthropy SOCIAL / PHILANTHROPIC DRIVERS Environmental sustainability, CSR and SRI considerations for Mainstream VC Investors COMMERCIAL DRIVERS Commercial Investment in Social / Environmental Sectors Social Enterprise Investment / Social Venture Capital Community Development Venture Capital Venture Philanthropy / Charitable Initiatives The spectrum of venture capital involvement

  6. Mainstream VC Specialist VC VC / Social Social / VC Philanthropy SOCIAL / PHILANTHROPIC DRIVERS Environmental sustainability, CSR and SRI considerations for Mainstream VC Investors COMMERCIAL DRIVERS Commercial Investment in Social / Environmental Sectors Social Enterprise Investment / Social Venture Capital Community Development Venture Capital Venture Philanthropy / Charitable Initiatives The spectrum of venture capital involvement Venturesome

  7. Helping individual charities – what we offer • Working capital to cover cash flow fluctuations, e.g. when paid in arrears for services rendered. ‘Open’ working capital tides an organisation over before it has raised all the money it needs to meet its costs. ‘Closed’ working capital is used where the funding is already committed. • Development capital can be ‘hard’, for the resources needed to carry out operations (e.g. property, vehicles, equipment), or ‘soft’, to support growth and innovation (e.g. the development of a new product) • Pre-funding of fundraising, for example where an organisation is fundraising for a new building, and requires a bridging loan to enable it to proceed where it wishes to take advantage of a fixed contract price for building work

  8. Main financial mechanisms used by Venturesome • Underwriting / standby facilities • undertaking to provide financing for a particular project if budgeted income does not materialise • Unsecured loans • not taking security on the charity’s assets • Equity and quasi-equity • the return the funder receives is linked to the financial success of the venture

  9. Matching financial mechanisms to funding needs

  10. Matching financial mechanisms to funding needs HIGH CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan Patient Capital Quasi-equity Equity LOW CHANCE OF REPAYMENT Grant

  11. Matching financial mechanisms to funding needs HIGH CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan LOW RISK HIGH RISK Pre-funding Capital Fundraising Hard Development Capital Working Capital (open) Soft Development Capital Working Capital (closed) Patient Capital Quasi-equity Equity LOW CHANCE OF REPAYMENT Grant

  12. Matching financial mechanisms to funding needs HIGH CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan LOW RISK HIGH RISK Pre-funding Capital Fundraising Hard Development Capital Working Capital (open) Soft Development Capital Working Capital (closed) Patient Capital Quasi-equity Equity LOW CHANCE OF REPAYMENT Grant

  13. Matching financial mechanisms to funding needs HIGH CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan LOW RISK HIGH RISK Pre-funding Capital Fundraising Hard Development Capital Working Capital (open) Soft Development Capital Working Capital (closed) Patient Capital Quasi-equity Equity LOW CHANCE OF REPAYMENT INCREASING SUPPLY LITTLE SUPPLY Grant

  14. Matching financial mechanisms to funding needs

  15. Increasing evidence of commercial finance available HIGH CHANCE OF REPAYMENT Secured loan Standby Facility Overdraft Unsecured Loan LOW RISK HIGH RISK Soft Development Capital Pre-funding Capital Fundraising Working Capital (open) Hard Development Capital Working Capital (closed) Patient Capital Quasi-equity Equity LOW CHANCE OF REPAYMENT Need for further supply of capital and development of financial instruments Grant Who funds what?

  16. Charity or business?

  17. Social enterprise What is “social enterprise”?

  18. Model 1 “Cash Generator”

  19. Model 2 “Trade off financial and social returns”

  20. Model 3 “Lock-step”

  21. The investor universe + 8%

  22. The investor universe + 8% Market-rate return

  23. The investor universe 0% + 8% Market-rate return

  24. The investor universe 0% + 8% Capital-protected Market-rate return

  25. The investor universe - 100% 0% + 8% Capital-protected Market-rate return

  26. The investor universe - 100% 0% + 8% Grant-makers Capital-protected Market-rate return

  27. The investor universe - 100% - 15% 0% + 8% Grant-makers Capital-protected Market-rate return

  28. The investor universe - 100% - 15% 0% + 8% ? Grant-makers Capital-protected Market-rate return

  29. Future challenges • Changing the grant-making mindset

  30. Future challenges • Changing the grant-making mindset • Creating a guarantee fund

  31. Future challenges • Changing the grant-making mindset • Creating a guarantee fund • Using subordinated debt

  32. Future challenges • Changing the grant-making mindset • Creating a guarantee fund • Using subordinated debt • Creating a social stock exchange

  33. Future challenges • Changing the grant-making mindset • Creating a guarantee fund • Using subordinated debt • Creating a social stock exchange • Doing social investment banking deals

  34. Future challenges • Changing the grant-making mindset • Creating a guarantee fund • Using subordinated debt • Creating a social stock exchange • Doing social investment banking deals The emergence of a new financial services industry around social enterprises

  35. “Not everything that counts can be counted. And not everything that can be counted, counts.” Albert Einstein

  36. Case studies – working capital • Mental Health Media (2006) • low reserves but refocusing of activities required unrestricted funds to meet expenditure • open working capital needed • standby facility of £50,000 • remains undrawn as funds were raised as expected • Questscope (2004) • grants from World Bank and EU up to 14 months late, resulting in significant working capital problems • closed working capital needed • unsecured loan of £60,000 • repaid in full once grant payment was received

  37. Case studies – development capital • Women Like Us (2005) • budget shortfall plus a cashflow difficulty arising from committed funding being paid in arrears • open working capital and soft development capital needed • £25,000 standby facility and £25,000 unsecured loan • £20,000 drawn down, being repaid monthly • Facility extended in 2007; £50,000 standby facility offered • Charity Technology Trust (2007) • transitioning from grant-dependency to a more commercial model • soft development capital needed • £50,000 in the form of a Revenue Participation Right • first payment expected April 2008

  38. Case studies – pre-funding of fundraising • St. Cuthbert’s Church (2003) • third phase of extensive redevelopment project required building contracts to be signed, but fundraising was not 100% committed • pre-funding of fundraising • £80,000 standby facility • undrawn, facility ‘recycled’ • facility renewed 2007 • £50,000 underwriting ahead of BLF grant • undrawn, facility recently recycled

  39. Contact details: Paul Cheng pcheng@cafonline.org 0207 832 3056

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